Systemically Important Insurers – the debate continues…

Systemically Important Insurers – the debate continues…

On 6 June 2016, the Financial Stability Board (FSB) published a document titled: Developing Effective Resolution Strategies and Plans for Systemically Important Insurers.

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It provides guidance on developing effective resolution strategies and plans for systemically important insurers. The Guidance should assist authorities in meeting the resolution planning requirement under the Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) and support Crisis Management Groups (CMGs) of global systemically important insurers (G-SIIs) in their resolution planning work.

The Guidance sets out detailed considerations for determining a preferred resolution strategy based on a strategic analysis of insurers’ business models, the criticality of insurers’ functions and policy holder protection arrangements. It also identifies a range of elements that need to be in place so that a resolution strategy can be credibly and feasibly be implemented, including effective cross-border cooperation, information systems and resources to absorb loss.

This update sets a direction of travel in terms of supervisory expectations, thus providing much needed guidance for insurers, but a number of questions remain unanswered:

What are critical functions?

There is no clear indication of which actual functions might be included or excluded – the implication is that all traditional insurance (life and general) could be critical functions. However, the paper does recognize that some of these functions may be substitutable more or less easily and more or less quickly.

What counts as “material” to the real economy?

There is a read across to a challenge facing the banking sector here. An issue is whether resolution tools should be used for smaller firms, where their activities are critical but not material to the wider economy.

Who will bear the losses of an insolvent (or recapitalized) insurer?

It would be useful to identify (i) which policy holders could (or could not) be subject to bail in (e.g. would policy holders with protection from a guarantee scheme be excluded?); (ii) the order in which eligible creditors might be bailed in (e.g. are some policy holders bailed in before others?); and (iii) the extent to which the bail in tool should/can be used before resorting to a resolution fund or even government funding. As it stands the guidance talks about writing down the value of liabilities, without specifying how this might operate in practice.

What does this mean in relation to the failure of a reinsurer?

In October 2014, the FSB identified the failure of a major reinsurance arrangement as a critical function, as it has the potential to cause significant disruption through associated impacts on insurers and their activities. The IAIS is expected to revise the insurance groups designated as G-SIIs by November, including reinsurers.

Is it right to simply assume International cooperation?

The last crisis demonstrated how supervisors locked down surplus assets and placed restrictions on transfers of capital between group entities. The success of this regime will rely heavily on the country supervisors collaborating across borders; the implicit challenge in achieving this is not recognised.

So what does this all mean for insurers?

It is very likely that supervisors will begin to integrate similar requirements within their domestic regimes. For example, the Chinese regulator has recently released an exposure draft set of requirements for D-SIIs. The IAIS is also expected to include similar requirements in module 3 of ComFrame applicable to all IAIGs and is now in the process of updating its ERM ICP. Clients will therefore be particularly interested in knowing how best to respond to these new emerging requirements and particularly, how their national supervisor proposes to involve other supervisors as part of the Crisis Management Group (CMG).

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